UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-28018

YAHOO! INC.

(Exact name of Registrant as specified in its charter)

Delaware		77-0398689
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

701 First Avenue
Sunnyvale, California 94089

(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 349-3300

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-Accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at August 1, 2006
Common stock, $0.001 par value		1,381,175,598

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

YAHOO! INC.

Condensed Consolidated Statements of Income

(unaudited, in thousands except per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2006			June 30, 2005			June 30, 2006

Revenues	$	1,252,997		$	1,575,854		$	2,426,739		$	3,142,909
Cost of revenues ^(*)	500,158			645,767			967,082			1,303,710
Gross profit	752,839			930,087			1,459,657			1,839,199

Operating expenses:
Sales and marketing ^(*)	247,915			325,845			479,924			657,005
Product development ^(*)	129,285			208,743			251,896			426,320
General and administrative ^(*)	87,128			131,909			165,387			260,214
Amortization of intangibles	27,154			34,003			53,730			64,861
Total operating expenses	491,482			700,500			950,937			1,408,400

Income from operations	261,357			229,587			508,720			430,799
Other income, net	979,736			36,090			1,029,730			71,526
Income before income taxes, earnings in equity interests and minority interests	1,241,093			265,677			1,538,450			502,325
Provision for income taxes	(515,855		)	(122,698		)	(636,290		)	(225,630		)
Earnings in equity interests	33,105			21,634			62,483			48,071
Minority interests in operations of consolidated subsidiaries	(3,654		)	(283		)	(5,394		)	(577		)
Net income	$	754,689		$	164,330		$	959,249		$	324,189

Net income per share—basic	$	0.54		$	0.12		$	0.69		$	0.23

Net income per share—diluted	$	0.51		$	0.11		$	0.65		$	0.22

Shares used in per share calculation—basic	1,395,596			1,405,598			1,390,277			1,411,758

Shares used in per share calculation—diluted	1,484,200			1,476,642			1,481,114			1,484,809

Stock-based compensation expense by function ^(*):
Cost of revenues	$	—		$	1,582		$	—		$	3,267
Sales and marketing	1,509			38,489			2,999			77,356
Product development	3,741			36,170			7,003			73,887
General and administrative	5,698			23,482			10,412			53,854

Total stock-based compensation expense	$	10,948		$	99,723		$	20,414		$	208,364

The accompanying notes are an integral part of these condensed consolidated financial statements.

^(*) Cost of revenues and operating expenses for the three and six months ended June 30, 2006 include stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123R, which the Company adopted on January 1, 2006. See Note 10—“Stock-Based Compensation” for additional information.

YAHOO! INC.

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except par values)

	December 31, 2005			June 30, 2006

ASSETS
Current assets:
Cash and cash equivalents	$	1,429,693		$	1,591,223
Marketable debt securities	1,131,141			1,097,332
Accounts receivable, net	721,723			792,451
Prepaid expenses and other current assets	166,976			173,699
Total current assets	3,449,533			3,654,705
Long-term marketable debt securities	1,439,014			1,276,117
Property and equipment, net	697,522			884,005
Goodwill	2,895,557			2,975,278
Intangible assets, net	534,615			454,040
Other assets	57,192			136,175
Investment in equity interests	1,758,401			1,810,242
Total assets	$	10,831,834		$	11,190,562

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	70,291		$	139,378
Accrued expenses and other current liabilities	827,589			935,008
Deferred revenue	306,172			348,505
Total current liabilities	1,204,052			1,422,891
Long-term deferred revenue	67,792			64,189
Long-term debt	749,995			749,971
Other long-term liabilities	243,580			247,928
Minority interests in consolidated subsidiaries	—			7,921

Stockholders’ equity:
Common Stock, $0.001 par value; 5,000,000 shares authorized; 1,430,162 and 1,414,422 issued and outstanding, respectively	1,470			1,483
Additional paid-in capital	6,417,858			7,054,451
Deferred stock-based compensation	(235,394		)	—
Treasury stock	(547,723		)	(1,732,932		)
Retained earnings	2,966,169			3,290,358
Accumulated other comprehensive income (loss)	(35,965		)	84,302
Total stockholders’ equity	8,566,415			8,697,662
Total liabilities and stockholders’ equity	$	10,831,834		$	11,190,562

The accompanying notes are an integral part of these condensed consolidated financial statements.

YAHOO! INC.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Six Months Ended
	June 30, 2005			June 30, 2006

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	959,249		$	324,189
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	102,751			139,201
Amortization of intangible assets	81,617			113,426
Stock-based compensation expense	20,414			208,364
Tax benefits from stock-based compensation	602,568			164,281
Excess tax benefits from stock-based compensation	—			(215,944		)
Earnings in equity interests	(62,483		)	(48,071		)
Dividends received	10,670			12,908
Minority interests in operations of consolidated subsidiaries	5,394			577
Gains from sales of investments, assets, and other, net	(952,266		)	(2,070		)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	(78,157		)	(53,355		)
Prepaid expenses and other	10,240			(15,963		)
Accounts payable	(14,193		)	63,753
Accrued expenses and other liabilities	79,816			88,596
Deferred revenue	24,290			34,673
Net cash provided by operating activities	789,910			814,565

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net	(161,800		)	(316,825		)
Purchases of marketable debt securities	(5,474,827		)	(648,333		)
Proceeds from sales and maturities of marketable debt securities	5,374,465			845,674
Acquisitions, net of cash acquired	(126,374		)	(55,329		)
Proceeds from sales of marketable equity securities	970,296			—
Other investing activities, net	(38,595		)	(644		)
Net cash provided by (used in) investing activities	543,165			(175,457		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net	302,724			189,825
Repurchases of common stock	(164,895		)	(690,209		)
Structured stock repurchases, net	(359,931		)	(227,705		)
Excess tax benefits from stock-based compensation	—			215,944
Other financing activities, net	800			—
Net cash provided by (used in) financing activities	(221,302		)	(512,145		)
Effect of exchange rate changes on cash and cash equivalents	(15,073		)	34,567

Net change in cash and cash equivalents	1,096,700			161,530
Cash and cash equivalents at beginning of period	823,723			1,429,693
Cash and cash equivalents at end of period	$	1,920,423		$	1,591,223

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company. Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo!” or the “Company”) is a leading global Internet brand and one of the most trafficked Internet destinations worldwide. Yahoo! seeks to provide Internet services that are essential and relevant to users and businesses through the provision of online properties (collectively referred to as the “Yahoo! Properties”) to Internet users and a range of tools and marketing solutions for businesses to market to that community of users.

Basis of Presentation. The condensed consolidated financial statements include the accounts of Yahoo! and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as Investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the closing date of the acquisition.

Certain prior period amounts have been reclassified to conform to the current period presentation. The Company has changed the classification of amortization expense related to developed technology and patents acquired through acquisitions in the condensed consolidated statements of income. Amortization expenses of $14 million and $28 million for the three and six months ended June 30, 2005, respectively, were previously included as part of operating expenses and have been reclassified to cost of revenues. Amortization expenses included in cost of revenues for the three and six months ended June 30, 2006 were $23 million and $49 million, respectively.

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period.

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to uncollectible receivables, the useful lives of long-lived assets including property and equipment, investment fair values, goodwill and other intangible assets, investments in equity interests, income taxes, and contingencies. In addition, the Company uses assumptions when employing the Black-Scholes option valuation model to calculate the fair value of stock-based awards granted. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2005 was derived from the Company’s audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes the disclosures are adequate to make the information presented not misleading.

Recent Accounting Pronouncements

Effective January 1, 2006 the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), and the Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2006 reflect the impact of SFAS 123R. For the three and six months ended June 30, 2006, the Company recorded stock-based compensation expense of $100 million and $208 million, respectively, which reduced gross profit by $2 million and $3 million, respectively. As a result of adopting SFAS 123R the Company’s income from operations for the three and six months ended June 30, 2006 was lower by $76 million and $163 million, respectively, and net income by $55 million and $113 million, respectively, than if the Company had continued to account for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Basic and diluted net income per share for the three and six months ended June 30, 2006 was $0.04 and $0.08 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25. The Company also capitalized $3 million and $5 million of stock-based compensation

expense in the three and six months ended June 30, 2006, respectively which is now part of property and equipment, net on the condensed consolidated balance sheets. For the three and six months ended June 30, 2005, the Company recognized $11 million and $20 million, respectively, of stock-based compensation expense under the intrinsic value method in accordance with APB 25. In addition, prior to the adoption of SFAS 123R, the Company presented tax benefits from stock-based compensation as cash flows from operating activities. Upon the adoption of SFAS 123R, the gross benefits of tax deductions related to stock-based compensation in excess of the grant date fair value of the related stock-based awards are now classified as cash flows from financing activities. See Note 10—“Stock-Based Compensation” for further information.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial position, cash flows, and results of operations.

Note 2 BASIC AND DILUTED NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock that is subject to repurchase. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of unvested restricted stock and restricted stock units, collectively referred to as “restricted stock awards” (using the treasury stock method), the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s zero coupon senior convertible notes (using the if-converted method). For the three months ended June 30, 2005 and 2006, approximately 55 million and 92 million options to purchase common stock, respectively, were excluded from the calculation, as they were anti-dilutive. For the six months ended June 30, 2005 and 2006, approximately 61 million and 88 million options to purchase common stock, respectively were excluded from the calculation, as they were anti-dilutive. See Note 9—“Long-Term Debt” for additional information related to the Company’s zero coupon senior convertible notes. The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2006			June 30, 2005			June 30, 2006

Numerator:
Net income	$	754,689		$	164,330		$	959,249		$	324,189

Denominator:
Weighted average common shares	1,398,690			1,410,285			1,392,870			1,416,536
Weighted average unvested restricted stock subject to repurchase	(3,094		)	(4,687		)	(2,593		)	(4,778		)
Denominator for basic calculation	1,395,596			1,405,598			1,390,277			1,411,758

Weighted average effect of dilutive securities:
Employee stock options	51,566			32,678			53,282			34,851
Convertible notes	36,585			36,585			36,585			36,585
Restricted stock awards	453			1,781			970			1,615
Denominator for diluted calculation	1,484,200			1,476,642			1,481,114			1,484,809
Net income per share—basic	$	0.54		$	0.12		$	0.69		$	0.23
Net income per share—diluted	$	0.51		$	0.11		$	0.65		$	0.22

Note 3 ACQUISITIONS

Transactions completed in 2005

Verdisoft Corporation. On February 11, 2005, the Company acquired Verdisoft Corporation (“Verdisoft”), a software development company. The acquisition of Verdisoft enhanced the Company’s platform for delivering content and services to mobile devices as part of the Company’s strategy to provide users with seamless access to its network. The transaction was treated as an asset acquisition for accounting purposes and therefore no goodwill was recorded. The purchase price was $58 million and consisted of $54 million in cash consideration, $3 million related to stock options exchanged and $1 million of direct transaction costs. In connection with the acquisition, the Company also issued approximately 1 million shares of restricted stock valued at $35 million that will be recognized as expense over three years as the Company’s right to repurchase these shares lapses on the third anniversary of the date of grant. For accounting purposes, $93 million was allocated to amortizable intangible assets, $37 million to liabilities, primarily deferred income tax liabilities, and $2 million to deferred stock-based compensation (of which the outstanding balance on January 1, 2006 was netted against additional paid-in capital upon the adoption of SFAS 123R). The amortizable intangible assets have useful lives not exceeding four years and a weighted average useful life of approximately 3 years.

Yahoo! Europe and Yahoo! Korea. In November 1996, the Company entered into joint ventures with SOFTBANK Corp. (including its consolidated affiliates, “SOFTBANK”) whereby separate companies were formed in the United Kingdom, France and Germany (collectively, “Yahoo! Europe”), which established and managed local versions of Yahoo! in those countries. In August 1997, the Company entered into a similar joint venture with SOFTBANK in Korea. Prior to November 2005, the Company had a majority share of approximately 70 percent in each of the Yahoo! Europe entities and 67 percent in Yahoo! Korea and therefore the results of these entities were included in the Company’s consolidated financial statements, with minority interests separately presented on the consolidated statements of income and consolidated balance sheets. On November 23, 2005, the Company purchased SOFTBANK’s remaining shares in the joint ventures giving the Company 100 percent ownership in these entities.

The total purchase price of $501 million consisted of $500 million in cash consideration and direct transaction costs of $1 million.

The allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):

Net tangible assets acquired	$	52,484
Amortizable intangible assets:
Customer contracts and related relationships	30,561
Developed technology and patents	6,570
Trade name, trademark and domain name	50,121
Goodwill	387,771
Total assets acquired	527,507
Deferred income taxes	(26,633		)
Total	$	500,874

The amortizable intangible assets have useful lives not exceeding five years and a weighted average life of approximately 4 years. No amount has been allocated to in-process research and development and $388 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

Other Acquisitions—Business Combinations. During the year ended December 31, 2005, the Company acquired four other companies which were accounted for as business combinations. The total purchase price for these four acquisitions was $79 million and consisted of $73 million in cash consideration, $3 million related to stock options exchanged and $3 million of direct transaction costs. The total cash consideration of $73 million less cash acquired of $3 million resulted in net cash outlay of $70 million. Of the purchase price, $58 million was allocated to goodwill, $32 million to amortizable intangible assets and $11 million to net assumed liabilities. Approximately $1 million was allocated to in-process research and development and expensed in the condensed consolidated statements of income. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

The purchase price allocations for certain of these acquisitions are preliminary and subject to revision as more detailed analyses are completed and additional information on the fair value of assets and liabilities becomes available. Any change in the fair value of the net assets of the acquired companies will change the amount of the purchase price allocable to goodwill.

During 2005, the Company also made a strategic investment in Alibaba.com Corporation (“Alibaba”)—see Note 4—“Investments in Equity Interests” and completed immaterial asset acquisitions that did not qualify as business combinations.

Transactions completed in 2006

Seven Networks Limited. On January 29, 2006, the Company and Seven Network Limited (“Seven”), a leading Australian media company, completed a strategic partnership in which the Company contributed its Australian Internet business, Yahoo! Australia and New Zealand (“Yahoo! Australia”), and Seven contributed its online assets, television and magazine content, an option to purchase its 33 percent ownership interest in mobile solutions provider m.Net Corporation Ltd, and cash of AUD $10 million. The Company believes this strategic partnership and the contribution of the respective businesses with their rich media and entertainment content will create a comprehensive and engaging online experience for local users and advertisers. The Company obtained a 50 percent equity ownership interest in the newly formed entity, which operates as “Yahoo!7.” Pursuant to a shareholders agreement and a power of attorney granted by Seven to vote certain of its shares, the Company has the right to vote 50.1 percent of the outstanding voting interests in Yahoo!7 and control over the day-to-day operations and therefore consolidates Yahoo!7, which includes the operations of Yahoo! Australia. For accounting purposes, the Company is considered to have acquired the assets contributed by Seven in exchange for 50 percent of the ownership of Yahoo! Australia. Accordingly, the Company accounted for this transaction in accordance with SFAS No. 141 “Business Combinations.” The total estimated purchase price was $34 million including direct transaction costs of $2 million.

The preliminary allocation of the purchase price of the Company’s share of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):

Cash acquired	$	3,763
Other tangible assets acquired	2,400
Amortizable intangible assets:
Customer contracts, related relationships and developed technology and patents	18,600
Goodwill	15,641
Total assets acquired	40,404
Deferred income taxes	(6,075		)
Total	$	34,329

The amortizable intangible assets have useful lives not exceeding seven years and a weighted average useful life of seven years. No amounts have been allocated to in-process research and development and approximately $16 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. The preliminary allocation of the purchase price is subject to revision as more detailed analyses are completed and additional information on the fair value of assets and liabilities becomes available. Any change in the fair value of the net assets acquired will change the amount of the purchase price allocable to goodwill.

As a result of this transaction, the Company’s ownership in Yahoo! Australia, which is now part of Yahoo!7, decreased to 50 percent. The Company effectively recognized a non-cash gain of approximately $30 million representing the difference between the fair value of Yahoo! Australia and its carrying value adjusted for the Company’s continued ownership in Yahoo!7. This non-cash gain was accounted for as a capital transaction and recorded as additional paid-in capital because of certain future events that could affect actual realization of the gain. The Company also recorded a minority interest of $7 million related to its reduced ownership of Yahoo! Australia and Seven’s retained interest in their contributed net assets.

Investment in Gmarket Inc. On June 12, 2006, the Company acquired an approximate 10 percent interest in Gmarket Inc., a leading retail e-commerce provider in South Korea, for $61 million, including direct transaction costs of approximately $1 million.

Note 4 INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the Company’s investment in equity interests (dollars in thousands):

	December 31, 2005		June 30, 2006		Percent Ownership
Alibaba	$	1,408,716	$	1,399,652	46%
Yahoo! Japan	349,685		410,590		34%
Total	$	1,758,401	$	1,810,242

Equity Investment in Alibaba. On October 23, 2005, the Company acquired approximately 46 percent of the outstanding common stock of Alibaba, which represented an approximate 40 percent equity interest on a fully diluted basis, in exchange for $1.0 billion in cash, the contribution of the Company’s China based businesses, including 3721 Network Software Company Limited (“Yahoo China”), and direct transaction costs of $8 million. Pursuant to the terms of a shareholder agreement, the Company has an approximate 35 percent voting interest in Alibaba, with the remainder of its voting rights subject to a voting agreement with Alibaba management. Other investors in Alibaba include SOFTBANK.

Through this transaction, the Company has combined its leading search capabilities with Alibaba’s leading online marketplace and online payment system and Alibaba’s strong local presence, expertise and vision in the China market. These factors contributed to a purchase price in excess of the Company’s share of the fair value of Alibaba’s net tangible and intangible assets acquired resulting in goodwill.

The investment in Alibaba is being accounted for using the equity method and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of the Investment in equity interests balance on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Alibaba and any related amortization expense, one quarter in arrears, within Earnings in equity interests on the condensed consolidated statements of income. The purchase price was based on acquiring a 40 percent equity interest in Alibaba on a fully diluted basis. As of March 31, 2006, the Company’s equity interest in the outstanding common stock of Alibaba was approximately 46 percent. In allocating the excess of the carrying value of its investment in Alibaba over its proportionate share of the net assets of Alibaba, the Company allocated a portion of the excess to goodwill to account for the estimated reductions in the carrying value of the investment in Alibaba that may occur as the Company’s equity interest is diluted.

As of June 30, 2006, the difference between the Company’s carrying value of its investment in Alibaba and its proportionate share of the net assets of Alibaba is summarized as follows (in thousands):

Carrying value of investment in Alibaba	$	1,399,652
Proportionate share of net assets of Alibaba	887,531
Excess of carrying value of investment over proportionate share of net assets	$	512,121

The excess carrying value has been primarily assigned to:
Goodwill	$	435,346
Amortizable intangible assets	79,473
Deferred income taxes	(2,698		)
Total	$	512,121

The amortizable intangible assets have useful lives not exceeding seven years and a weighted average useful life of approximately 5 years. No amount has been allocated to in-process research and development. Goodwill is not deductible for tax purposes.

Following the acquisition date, Yahoo! China has not been included in the Company’s consolidated results but is included within earnings in equity interests to the extent of the Company’s continued ownership in Alibaba. The results of operations of Yahoo! China were not material to the consolidated results of the Company for the three and six months ended June 30, 2005. In connection with the transaction, in the fourth quarter of 2005, the Company recorded a non-cash gain of $338 million in other income, net, based on the difference between the fair value of Yahoo! China and its carrying value adjusted for the Company’s continued ownership in the newly combined entity.

In April 2006, the Company’s ownership interest in Alibaba decreased to approximately 44 percent primarily as a result of the conversion of Alibaba’s outstanding convertible debt. As the Company records its share of the results of Alibaba one quarter in arrears, the Company will recognize the effects of this dilution in its condensed consolidated financial statements in the quarter ending September 30, 2006. The Company’s ownership interest in Alibaba may be further diluted to 40 percent upon exercise of Alibaba’s employee stock options. The Company will recognize non-cash gains if and when further dilution to its ownership interest in Alibaba occurs.

The Company also has commercial arrangements with Alibaba to provide technical and development services. For the three and six months ended June 30, 2006, these transactions were not material.

Equity Investment in Yahoo! Japan. During April 1996, the Company signed a joint venture agreement with SOFTBANK, which was amended in September 1997, whereby Yahoo! Japan Corporation (“Yahoo! Japan”) was formed. Yahoo! Japan was formed to establish and manage a local version of Yahoo! in Japan. During the three months ended June 30, 2005 and 2006, the Company received cash dividends from Yahoo! Japan in the amounts of $11 million and $13 million, respectively which were recorded as reductions in the Company’s investment in Yahoo! Japan. The Company also has commercial arrangements with Yahoo! Japan, consisting of services, including algorithmic search services and sponsored search services and the related traffic acquisition costs and license fees. The net cost of these arrangements was approximately $38 million and $59 million for the

three months ended June 30, 2005 and 2006, respectively. The net cost of these arrangements was approximately $72 million and $119 million for the six months ended June 30, 2005 and 2006, respectively.

The investment in Yahoo! Japan is being accounted for using the equity method and the total investment is classified as a part of the Investment in equity interests balance on the condensed consolidated balance sheets. The Company records its share of the results of Yahoo! Japan one quarter in arrears within Earnings in equity interests on the condensed consolidated statements of income. The fair value of the Company’s approximate 34 percent ownership interest in Yahoo! Japan, based on the quoted stock price, was approximately $11 billion as of June 30, 2006.

The following table presents Yahoo! Japan’s condensed operating financial information, as derived from the Yahoo! Japan statements of operations, for the three and six months ended March 31, 2005, and 2006 (in thousands):

	Three Months Ended				Six Months Ended
	March 31, 2005		March 31, 2006		March 31, 2005		March 31, 2006
Operating data
Revenues	$	342,845	$	402,601	$	635,880	$	800,120
Gross profit	$	311,699	$	388,381	$	583,602	$	749,653
Income from operations	$	167,773	$	201,805	$	314,059	$	381,912
Net income	$	98,680	$	111,148	$	186,236	$	218,975

The differences between United States and Japanese generally accepted accounting principles did not materially impact the amounts reflected in the Company’s financial statements.

Note 5 GOODWILL

The changes in the carrying amount of goodwill for the six months ended June 30, 2006 are as follows (in thousands):

	United States		International		Total

Balance as of January 1, 2006	$	1,720,752	$	1,174,805	$	2,895,557
Acquisitions and other*	1,219		13,977		15,196
Foreign currency translation adjustments	—		64,525		64,525
Balance as of June 30, 2006	$	1,721,971	$	1,253,307	$	2,975,278

* Other primarily includes certain purchase price adjustments that affect existing goodwill.

Note 6 INTANGIBLE ASSETS, NET

The following table summarizes the Company’s intangible assets, net (in thousands):

	December 31, 2005		June 30, 2006
	Net		Gross carrying Amount		Accumulated amortization*		Net

Trademark, trade name and domain name	$	122,657	$	185,657	$	71,957	$	113,700
Customer, affiliate, and advertiser related relationships	159,442		367,339		232,403		134,936
Developed technology and patents	252,516		372,123		166,719		205,404
Total intangible assets, net	$	534,615	$	925,119	$	471,079	$	454,040

* Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $12 million as of June 30, 2006.

For the three months ended June 30, 2005 and 2006, the Company recognized amortization expense for intangible assets of $41 million and $57 million, respectively. For the six months ended June 30, 2005 and 2006 the Company recognized amortization expense for intangible assets of approximately $82 million and $113 million, respectively. Based on the current amount of

intangibles subject to amortization, the estimated amortization expense for each of the succeeding five years is as follows: six months ending December 31, 2006: $110 million; 2007: $187 million; 2008: $114 million; 2009: $21 million; 2010: $12 million and thereafter: $10 million.

Note 7 OTHER INCOME, NET

Other income, net is comprised of (in thousands):

	Three Months Ended					Six Months Ended
	June 30, 2005		June 30, 2006			June 30, 2005		June 30, 2006

Interest and investment income	$	27,100	$	37,924		$	50,872	$	73,401
Investment gains (losses), net	949,149		(4,106		)	968,283		(3,335		)
Other	3,487		2,272			10,575		1,460

Total other income, net	$	979,736	$	36,090		$	1,029,730	$	71,526

Investment gains (losses), net include realized investment gains, realized investment losses, realized gains on derivatives, and impairment charges related to declines in values of publicly traded and privately held companies judged to be other than temporary. Investment gains (losses) include gains in the amounts of $949 million and $968 million in the three and six months ended June 30, 2005, respectively, related to the sales of non-strategic marketable equity security investments.

Note 8 COMPREHENSIVE INCOME

Comprehensive income, net of taxes, is comprised of (in thousands):

	Three Months Ended					Six Months Ended
	June 30, 2005			June 30, 2006		June 30, 2005			June 30, 2006

Net income	$	754,689		$	164,330	$	959,249		$	324,189

Change in net unrealized gains /losses on available-for-sale securities, net of tax and reclassification adjustments	(418,596		)	7,330		(463,291		)	20,199
Foreign currency translation adjustment	(46,066		)	85,331		(48,991		)	100,068
Other comprehensive income (loss)	(464,662		)	92,661		(512,282		)	120,267

Comprehensive income	$	290,027		$	256,991	$	446,967		$	444,456

The following table summarizes the components of accumulated other comprehensive income (loss) (in thousands):

	December 31, 2005			June 30, 2006

Unrealized gains (losses) on available-for-sale securities, net of tax	$	(16,218	)	$	3,981
Cumulative foreign currency translation adjustment	(19,747		)	80,321

Accumulated other comprehensive income (loss)	$	(35,965	)	$	84,302

Note 9 LONG-TERM DEBT

In April 2003, the Company issued $750 million of zero coupon senior convertible notes (the “Notes”) due April 2008, resulting in net proceeds to the Company of approximately $733 million after transaction fees of $17 million, which have been deferred and are included on the condensed consolidated balance sheets in other assets. As of June 30, 2006, $6 million of the transaction fees remain to be amortized. The Notes were issued at par and bear no interest. The Notes are convertible into Yahoo! common stock at a conversion price of $20.50 per share, which would result in the issuance of an aggregate of

approximately 37 million shares, subject to adjustment upon the occurrence of specified events. Each $1,000 principal amount of the Notes will initially be convertible into 48.78 shares of Yahoo! common stock.

The Notes are convertible prior to the final maturity date (1) during any fiscal quarter if the closing sale price of the Company’s common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeded 110 percent of the conversion price on that 30^th trading day, (2) during the period beginning January 1, 2008 through the maturity date, if the closing sale price of the Company’s common stock on the previous trading day was 110 percent or more of the then current conversion price, and (3) upon specified corporate transactions. Upon conversion, the Company has the right to deliver cash in lieu of common stock. The Company may be required to repurchase all of the Notes following a fundamental change of the Company, such as a change of control, prior to maturity at face value. The Company may not redeem the Notes prior to their maturity.

As of June 30, 2006, the market price condition for convertibility of the Notes was satisfied with respect to the fiscal quarter beginning on July 1, 2006 and ending on September 30, 2006. During this period holders of the Notes will be able to convert their Notes into shares of Yahoo! common stock at the rate of 48.78 shares of Yahoo! common stock for each Note. The Notes will also be convertible into shares of Yahoo! common stock in subsequent fiscal quarters, if any, with respect to which the market price condition for convertibility is met.

As of June 30, 2006 the fair value of the Notes was approximately $1.2 billion based on quoted market prices. The shares issuable upon conversion of the Notes have been included in the computation of diluted net income per share since the Notes were issued.

Note 10 STOCK-BASED COMPENSATION

Stock-Based Compensation. Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with APB 25 and SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No.148 “Accounting for Stock-Based Compensation—Transition and Disclosures.” Under the intrinsic value method, the recorded stock-based compensation expense was related to the amortization of the intrinsic value of Yahoo! stock options issued and assumed in connection with business combinations and other stock-based awards issued by the Company. Options granted with exercise prices equal to the grant date fair value of the Company’s stock have no intrinsic value and therefore no expense was recorded for these options under APB 25. For stock options whose exercise price was below the grant date fair value of the Company’s stock (principally options assumed in business combinations), the difference between the exercise price and the grant date fair value of the Company’s stock was expensed over the service period (generally the vesting period) using an accelerated amortization approach in accordance with FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Other stock-based awards for which stock-based compensation expense was recorded were generally grants of restricted stock awards which were measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value was recognized as an expense over the corresponding service period.

Effective January 1, 2006 the Company adopted SFAS 123R using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted prior to its adoption are expensed over the remaining portion of their vesting period. These awards are expensed under the accelerated amortization approach using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123. For stock-based awards granted on or after January 1, 2006, the Company records stock-based compensation expense on a straight-line basis over the requisite service period, which is generally a four year vesting period. SFAS 123R requires that the deferred stock-based compensation on the condensed consolidated balance sheet on the date of adoption be netted against additional paid-in capital. As of December 31, 2005, there was a balance of $235 million of deferred stock-based compensation that was netted against additional paid-in capital on January 1, 2006.

For the three and six months ended June 30, 2006, the Company recorded stock-based compensation expense of $100 million and $208 million, respectively, which reduced gross profit by $2 million and $3 million, respectively. As a result of adopting SFAS 123R the Company’s income from operations for the three and six months ended June 30, 2006 was lower by $76 million and $163 million, respectively, and net income by $55 million and $113 million, respectively, than if the Company had continued to account for stock-based compensation under APB 25. Basic and diluted net income per share for the three and six months ended June 30, 2006 was $0.04 and $0.08 lower, respectively than if the company had continued to account for stock-based compensation under APB 25. For the three and six months ended June 30, 2005, the Company recognized $11 million and $20 million, respectively, of stock-based compensation expense under the intrinsic value method.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual

forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the three and six months ended June 30, 2006 such that expense was recorded only for those stock-based awards that are expected to vest. Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture. Upon the adoption of SFAS 123R, the Company recorded a cumulative adjustment to account for the expected forfeitures of stock-based awards granted prior to January 1, 2006, for which the Company previously recorded an expense. This adjustment was not material and was recorded as a reduction to stock-based compensation expense in the three months ended March 31, 2006.

Upon the adoption of SFAS 123R, the Company included as part of cash flows from financing activities the gross benefit of tax deductions related to stock-based awards in excess of the grant date fair value of the related stock-based awards for the options exercised during the six months ended June 30, 2006 and certain options exercised in prior periods. This amount is shown as a reduction to cash flows from operating activities and an increase to cash flows from financing activities. Total cash flows remain unchanged from what would have been reported prior to the adoption of SFAS 123R.

Stock Plans. The Company’s 1995 Stock Plan and stock option plans assumed through acquisitions are collectively referred to as the “Plans.” The 1995 Stock Plan provides for the issuance of stock-based awards to employees, including executive officers and consultants. The 1995 Stock Plan permits the granting of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, indexed options, and dividend equivalents.

Options granted under the 1995 Stock Plan before May 19, 2005 generally expire ten years after the grant date and options granted after May 19, 2005 generally expire seven years after the grant date. Options generally become exercisable over a four year period based on continued employment and vest either monthly, quarterly, semi-annually, or annually.

The 1995 Stock Plan permits the granting of restricted stock and restricted stock units, collectively referred to as “restricted stock awards.” Restricted stock awards generally vest upon meeting certain performance-based objectives or the passage of time, or a combination of both, and continued employment through the vesting period. Restricted stock award grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as an expense over the corresponding service period. Any shares of the Company’s common stock issued in settlement of restricted stock units will be counted against the Plans’ share limit as 1.75 shares for every one share issued in settlement of restricted stock units.

The Plans provide for the issuance of a maximum of approximately 654 million shares of which 64 million were still available for issuance as of June 30, 2006.

The 1996 Directors’ Option Plan (the “Directors’ Plan”) provides for the grant of nonqualified stock options and restricted stock units to non-employee directors of the Company. The Directors’ Plan provides for the issuance of up to approximately 9 million shares of the Company’s common stock, of which approximately 5 million were still available for issuance as of June 30, 2006. Any shares of the Company’s common stock issued in settlement of restricted stock units granted under the Directors’ Plan will be counted against the plan’s share limit as 1.75 shares for every one share actually issued in settlement of the restricted stock units.

Options granted under the Directors’ Plan before May 25, 2006 generally become exercisable, based on continued service as a director, in equal monthly installments over four years for initial grants to new directors and, for annual grants, over four years, in each case with 25 percent of such options vesting on the one year anniversary of the date of grant and the remaining options vesting in equal monthly installments over the remaining 36-month period thereafter. Such options generally expire ten years after the grant date. Options granted on or after May 25, 2006 become exercisable, based on continued service as a director, in equal quarterly installments over one year. Such options generally expire seven years after the grant date.

Restricted stock units granted under the Director’s Plan vest in equal quarterly installments over a one year period following the date of grant and are payable in an equal number of shares of the Company’s common stock on the earlier of the third anniversary of the grant date or the date the director ceases to be a member of the board.

Non-employee directors are now also permitted to elect an award of restricted stock units or a stock option under the Directors’ Plan in lieu of a cash payment of fees for serving as chairperson of a board committee. Such stock options or restricted stock unit awards granted on conversion of chairperson fees are fully vested on the grant date.

Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “Purchase Plan”), which allows employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of their annual compensation subject to certain Internal Revenue Code limitations. The price of common stock purchased under the Purchase Plan is equal to 85 percent of the lower of the fair market value of the common stock on the commencement date of each 24-month offering period or the specified purchase date. The Purchase Plan provides for the issuance of a maximum of approximately 30 million shares of common stock of which 14 million shares were still available as at June 30, 2006. For the

three and six months ended June 30, 2006, the stock-based compensation expense related to the activity under the Purchase Plan was $12 million and $26 million respectively. As of June 30, 2006 there was $53 million of unamortized stock-based compensation cost which will be recognized over a weighted average period of 1.2 years.

Executive Retention Compensation Agreement. During the three months ended June 30, 2006, the Compensation Committee of the Company’s Board of Directors, approved a three year performance and retention compensation arrangement with the Company’s Chief Executive Officer (“CEO”). For each of the years 2006 to 2008, the CEO will be eligible to receive a discretionary annual bonus payable in the form of a fully vested non-qualified stock option for up to 1 million shares with an exercise price equal to the closing trading price of the Company’s common stock on the date of the grant. As of June 30, 2006 there was $11 million of unamortized stock-based compensation cost related to the 2006 portion of this award which is expected to be recognized over the remainder of 2006.

Stock option activity under the Company’s Plans for the six months ended June 30, 2006 is summarized as follows (in thousands, except per share amounts and as noted):

	Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	182,694		$	28.11
Options granted	26,245		$	32.57
Options exercised (2)	(12,004	)	$	12.56
Options cancelled/forfeited/expired	(8,390	)	$	37.19
Outstanding at June 30, 2006	188,545		$	29.32	6.0	$	1,439,283

Vested and expected to vest at June 30, 2006 (1)	178,594		$	29.11	6.0	$	1,421,664

Exercisable at June 30, 2006	109,147		$	27.84	5.3	$	1,161,344

(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

(2) The Company’s current practice is to issue new shares to satisfy stock option exercises.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock on June 30, 2006 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on June 30, 2006. The total intrinsic value of options exercised in the three and six months ended June 30, 2006 was $115 million and $259 million, respectively. The weighted average grant date fair value of options granted in the three months ended June 30, 2005 and 2006 was $11.66 and $10.46, respectively. The weighted average grant date fair value of options granted in the six months ended June 30, 2005 and 2006 was $12.36 and $10.35, respectively.

As of June 30, 2006, there was $507 million of unamortized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 3.3 years.

Cash received from option exercises and purchases of shares under the Purchase Plan for the six months ended June 30, 2006 was $190 million.

The total tax benefit attributable to options exercised in the six months ended June 30, 2006 was $90 million.

The tax benefits from stock-based compensation for the six months ended June 30, 2006 was $164 million, which is reported on the condensed consolidated statements of cash flows. This represents the total amount of income tax benefit in the current period related to options exercised in current and prior periods, net of deferred tax benefits related to our current period stock-based compensation expense.

The gross excess tax benefits from stock-based compensation for the six months ended June 30, 2006 of $216 million, as reported on the condensed consolidated statements of cash flows in financing activities represent the reduction in income taxes otherwise payable during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in current and prior periods. The gross excess tax benefits for the six months ended June 30, 2006 were comprised of $73 million related to options exercised during the six months ended June 30, 2006 and $143 million related to options exercised in prior

periods. The Company has accumulated excess tax deductions relating to stock options exercised prior to January 1, 2006 available to reduce income taxes otherwise payable. To the extent such deductions are expected to reduce income taxes payable in the current year, they are reported as financing activities in the condensed consolidated statements of cash flows.

The fair value of option grants was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

	Stock Options				Purchase Plan (5)
	Three Months Ended				Three Months Ended
	June 30, 2005		June 30, 2006		June 30, 2005		June 30, 2006
Expected dividend yield (1)	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate (2)	3.7	%	5.0	%	1.3	%	5.0	%
Expected volatility (3)	40.1	%	34.3	%	39.4	%	31.7	%
Expected life (in years) (4)	3.5		3.8		0.5		1.2

	Stock Options				Purchase Plan (5)
	Six Months Ended				Six Months Ended
	June 30, 2005		June 30, 2006		June 30, 2005		June 30, 2006
Expected dividend yield (1)	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate (2)	3.7	%	4.9	%	1.3	%	5.0	%
Expected volatility (3)	40.9	%	34.0	%	39.4	%	31.7	%
Expected life (in years) (4)	3.8		3.8		0.5		1.2

(1) The Company has no history or expectation of paying dividends on its common stock.

(2) The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.

(3) The Company estimates the volatility of its common stock at the date of grant based on the implied volatility of publicly traded options on its common stock, with a term of one year or greater. Up to September 30, 2005, including the three and six months ended June 30, 2005, the Company used an equally weighted average of trailing volatility and market based implied volatility for the computation.

(4) The expected life of stock options granted under the Plans is based on historical exercise patterns, which the Company believes are representative of future behavior. The expected life of options granted under the Purchase Plan represents the amount of time remaining in the 24-month offering period.

(5) Assumptions for the Purchase Plan relate to the most recent enrollment period. Enrollment is currently permitted in May and November of each year.

Restricted stock awards activity for the six months ended June 30, 2006 is summarized as follows (in thousands, except per share amounts):

	Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2005	7,666		$	36.13
Granted	3,141		$	31.82
Vested	(165	)	$	30.10
Forfeited	(309	)	$	33.31

Unvested at June 30, 2006	10,333		$	35.00

As of June 30, 2006, there was $226 million of unamortized stock-based compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted average period of 2.3 years. No restricted stock awards vested during the three months ended June 30, 2005 and 2006 respectively. The total fair value of restricted stock awards vested during the six months ended June 30, 2006 and 2005 was $6 million and $5 million, respectively.

If the fair value based method under FAS 123, had been applied in measuring stock-based compensation expense for the three and six months ended June 30, 2005, the pro forma effect on net income and net income per share would have been as follows, as previously disclosed (in thousands, except per share amounts):

	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
Net income:
As reported	$	754,689		$	959,249
Add: Stock-based compensation expense included in reported net income, net of tax	6,568			12,248
Less: Stock-based compensation expense determined under fair value based method for all awards, net of tax	(57,147		)	(114,193		)
Pro forma net income	$	704,110		$	857,304

Net income per share:
As reported—basic	$	0.54		$	0.69
As reported—diluted	$	0.51		$	0.65
Pro-forma—basic	$	0.50		$	0.62
Pro-forma—diluted	$	0.47		$	0.58

Note 11 STOCK REPURCHASE PROGRAMS

In March 2001, the Company’s Board of Directors authorized the Company to repurchase up to $500 million of its outstanding shares of common stock over the following two years, depending on market conditions, share price and other factors. In March 2003, the Company’s Board of Directors authorized a two year extension of this stock repurchase program until March 2005. Under this program, from March 2001 through December 31, 2004, the Company repurchased 32.9 million shares of common stock at an average price of $4.86 per share for total consideration of $160 million. During this period, of the shares repurchased, 32.1 million shares were purchased from SOFTBANK at an average price of $4.84 per share. During the three months ended March 31, 2005, the Company repurchased an additional 4.9 million shares in the open market, at an average price of $33.60 per share, for total consideration of $165 million. This stock repurchase program has expired.

In March 2005, the Company’s Board of Directors authorized a new stock repurchase program for the Company to repurchase up to $3.0 billion of its outstanding shares of common stock over the next five years, depending on market conditions, share price and other factors. Under this program in the year ended December 31, 2005, the Company repurchased 6.8 million shares of common stock at an average price of $32.90 per share, for total consideration of $223 million.

In the three months ended June 30, 2006, the Company repurchased 13.8 million shares of common stock including 12.0 million shares received upon the maturity of structured stock repurchase transactions. The Company repurchased the shares at an average price of $31.62 per share. Total cash consideration for the repurchased stock was $436 million including cash consideration of $51 million paid during the current quarter, $250 million invested in a structured stock repurchase transaction entered into during the third quarter of 2005, and $135 million invested in a structured stock repurchase transaction entered into during the fourth quarter of 2005.

For the six months ended June 30, 2006 the Company repurchased 35.9 million shares at an average price of $33.04 per share. Total cash consideration for the repurchased stock was $1,185 million, including cash consideration of $690 million paid during the six months ended June 30, 2006, $250 million invested in a structured stock repurchase transaction entered into during the third quarter of 2005, and investments in structured stock repurchase transactions totaling $245 million entered into in the fourth quarter of 2005. The Company also received $272 million in cash upon settlement of a $250 million structured stock repurchase transaction entered into in 2005.

These repurchased shares are recorded as part of treasury stock. Treasury stock is accounted for under the cost method.

In the three months ended June 30, 2006, the Company entered into a $250 million structured stock repurchase transaction, which settles in cash or stock depending on the market price of Yahoo!’s common stock on the date of maturity. This transaction will settle in the fourth quarter of 2006. If the market price of Yahoo! common stock is above $32.53 the Company will have its investment returned with a premium. If the market price is at or below $32.53, the Company will repurchase 8.5 million shares of its common stock.

In aggregate as of June 30, 2006, there were outstanding structured stock repurchase transactions totaling $500 million which were entered into in the six months ended June 30, 2006 and will mature in the third and fourth quarters of 2006 and could result in the repurchase of up to 16.5 million shares.

These outstanding transactions are recorded in stockholders’ equity on the condensed consolidated balance sheets. See Note 14 - “Subsequent Events” for additional information.

Note 12 COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments. The Company leases office space and data centers under operating lease agreements with original lease periods of up to 23 years, expiring between 2006 and 2027.

A summary of net lease commitments as of June 30, 2006 follows (in millions):

	Gross lease commitments		Sublease income			Net lease Commitments
Six months ending December 31, 2006	$	40	$	(2	)	$	38
Years ending December 31,
2007	86		(1		)	85
2008	96		(2		)	94
2009	95		(1		)	94
2010	85		(1		)	84
2011	71		—			71
Due after 5 years	392		—			392
Total net lease commitments	$	865	$	(7	)	$	858

Affiliate Commitments. In connection with contracts to provide sponsored search services to affiliates, the Company is obligated to make payments, which represent traffic acquisition costs, to its affiliates. As of June 30, 2006, these commitments total $113 million of which $102 million will be payable in the remainder of 2006 and $11 million will be payable in 2007.

Other Commitments. In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The Company has also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers, and former directors and officers of acquired companies, in certain circumstances.

It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in its condensed consolidated financial statements.

As of June 30, 2006, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

As of June 30, 2006 the Company had commitments to purchase land located in Santa Clara, California. See Note 14 – “Subsequent Events” for additional information.

Contingencies. From time to time, third parties assert patent infringement claims against the Company. Currently, the Company is engaged in several lawsuits regarding patent issues and has been notified of a number of other potential patent disputes. In addition, from time to time the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, trade secrets and other intellectual property rights, claims related to employment matters, and a variety of claims, including claims alleging defamation or invasion of privacy, arising in connection with the Company’s e-mail, message boards, auction sites, shopping services and other communications and community features.

On May 24, 2001, Arista Records, Inc., Bad Boy Records, BMG Music d/b/a The RCA Records Label, Capitol Records, Inc., Virgin Records America, Inc., Sony Music Entertainment, Inc., UMG Recordings, Inc., Interscope Records, Motown Record Company, L.P., and Zomba Recording Corporation filed a lawsuit alleging copyright infringement against LAUNCH in the United States District Court for the Southern District of New York. The plaintiffs allege, among other things, that the

consumer-influenced portion of LAUNCH’s LAUNCHcast service is “interactive” within the meaning of Section 114 of the Copyright Act and therefore does not qualify for the compulsory license provided for by the Copyright Act. The Complaint seeks declaratory and injunctive relief and damages for the alleged infringement. After the lawsuit was commenced, the Company entered into an agreement to acquire LAUNCH. In June 2001, LAUNCH settled the LAUNCH litigation as to UMG Recordings, Inc. The Company’s acquisition of LAUNCH closed in August 2001, and since that time LAUNCH has been a wholly owned subsidiary of the Company. The Company and LAUNCH do not believe that LAUNCH has infringed any rights of plaintiffs and intend to vigorously contest the lawsuit. In January 2003, LAUNCH settled the LAUNCH litigation as to Sony Music Entertainment, Inc. In October 2003, LAUNCH settled the litigation as to Capitol Records, Inc. and Virgin Records America, Inc. Accordingly, BMG Music d/b/a/ The RCA Records Label is the sole remaining plaintiff in this proceeding. On March 16, 2004, the plaintiff filed motions for partial summary judgment on the issues of willful infringement and whether the consumer-influenced portion of LAUNCH’S LAUNCHcast service is “interactive” within the meaning of Section 114 of the Copyright Act and therefore does not qualify for the compulsory license provided for by the Copyright Act. LAUNCH filed its opposition to the motions for partial summary judgment on April 30, 2004, and a hearing on the motions was held on June 18, 2004. On November 4, 2005, the Court issued an order denying the plaintiff’s summary judgment motions as to interactivity and willful infringement. The Company does not believe it is feasible to predict or determine the outcome or resolution of the remaining LAUNCH litigation at this time. The range of possible resolutions of such LAUNCH litigation could include judgments against LAUNCH or settlements that could require substantial payments by LAUNCH.

On July 12, 2001, the first of several purported securities class action lawsuits was filed in the United States District Court for the Southern District of New York against certain underwriters involved in Overture’s initial public offering, Overture, and certain of Overture’s current and former officers and directors. The Court consolidated the cases against Overture. Plaintiffs allege, among other things, violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 involving undisclosed compensation to the underwriters, and improper practices by the underwriters, and seek unspecified damages. Similar complaints were filed in the same court against numerous public companies that conducted initial public offerings of their common stock since the mid-1990s. All of these lawsuits were consolidated for pretrial purposes before Judge Shira Scheindlin. On April 19, 2002, plaintiffs filed an amended complaint, alleging Rule 10b-5 claims of fraud. On July 15, 2002, the issuers filed a motion to dismiss for failure to comply with applicable pleading standards. On October 8, 2002, the Court entered an Order of Dismissal as to all of the individual defendants in the Overture IPO litigation, without prejudice. On February 19, 2003, the Court denied the motion to dismiss the Rule 10b-5 claims against certain defendants, including Overture. On August 31, 2005, the Court entered an order confirming its preliminary approval of a settlement proposal made by plaintiffs, which includes settlement of, and release of claims against, the issuer defendants, including Overture. The parties are awaiting final approval of the settlement. If the settlement does not occur, and litigation against Overture continues, the Company and Overture believe that Overture has meritorious defenses to liability and damages and will continue to defend the case vigorously.

The Company does not believe, based on current knowledge, that any of the foregoing legal proceedings or claims are likely to have a material adverse effect on its financial position, results of operations or cash flows. However, the Company may incur substantial expenses in defending against third party claims. In the event of a determination adverse to the Company or its subsidiaries, the Company may incur substantial monetary liability and be required to change our business practices. Either of these could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 13 SEGMENTS

The Company manages its business geographically. The primary areas of measurement and decision-making are the United States and International. Management relies on an internal management reporting process that provides revenue and segment operating income before depreciation, amortization and stock-based compensation expense for making financial decisions and allocating resources. Segment operating income before depreciation, amortization and stock-based compensation expense includes income from operations before depreciation, amortization and stock-based compensation expense. Management believes that segment operating income before depreciation, amortization and stock-based compensation expense is an appropriate measure of evaluating the operational performance of the Company’s segments. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with generally accepted accounting principles.

The following tables present summarized information by segment (in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2006			June 30, 2005			June 30, 2006

Revenues by segment:
United States	$	869,517		$	1,070,134		$	1,688,243		$	2,167,172
International	383,480			505,720			738,496			975,737
Total revenues	$	1,252,997		$	1,575,854		$	2,426,739		$	3,142,909

Segment operating income before depreciation, amortization and stock-based compensation expense:
United States	$	291,244		340,598			$	561,659		$	675,867
International	77,196			116,260			151,843			215,923

Total segment operating income before depreciation, amortization and stock-based compensation expense	368,440			456,858			713,502			891,790

Depreciation and amortization	(96,135		)	(127,548		)	(184,368		)	(252,627		)
Stock-based compensation expense	(10,948		)	(99,723		)	(20,414		)	(208,364		)
Income from operations	$	261,357		$	229,587		$	508,720		$	430,799

Capital expenditures, net:
United States	$	77,516		$	152,653		$	136,531		$	278,423
International	16,135			22,425			25,269			38,402
Total capital expenditures, net	$	93,651		$	175,078		$	161,800		$	316,825

	December 31, 2005		June 30, 2006
Property and equipment, net:
United States	$	613,426	$	781,503
International	84,096		102,502
Total property and equipment, net	$	697,522	$	884,005

Revenue is attributed to individual countries according to the international online property that generated the revenue. No single foreign country accounted for more than 10 percent of revenues in the three and six months ended June 30, 2005 and 2006.

The following table presents revenues for groups of similar services (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2005		June 30, 2006		June 30, 2005		June 30, 2006

Marketing services	$	1,094,301	$	1,386,245	$	2,119,097	$	2,767,099
Fees	158,696		189,609		307,642		375,810
Total revenues	$	1,252,997	$	1,575,854	$	2,426,739	$	3,142,909

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to current and historical information, this Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or the negative of such terms or other comparable terminology. This Report includes, among others, forward-looking statements regarding our:

• expectations about revenues for marketing services and fees;

• expectations about cost of revenues and operating expenses;

• expectations about growth in users;

• anticipated capital expenditures;

• evaluation of possible acquisitions of, or investments in, businesses, products and technologies; and

• expectations about positive cash flow generation and existing cash and investments being sufficient to meet normal operating requirements.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part II Item 1A “Risk Factors” of this Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

Overview

We are a leading global Internet brand and one of the most trafficked Internet destinations worldwide. We seek to provide Internet services that are essential and relevant to users and businesses. To users, we provide our owned and operated online properties and services (the “Yahoo! Properties”). To businesses, we provide a range of tools and marketing solutions designed to enable businesses to reach our community of users.

We offer a broad range and deep array of innovative products and services that are designed to provide our users with the power to connect, communicate, create, access, and share information online. We seek to provide efficient and effective marketing services for businesses to reach our community of users. Our focus is on engaging more deeply with users and increasing the user base on the Yahoo! Properties, thereby enhancing value for our advertisers. We believe that we can increase our existing and potential user base and our users’ engagement on the Yahoo! Properties not only by offering compelling Internet services, but also by effectively integrating search, community, personalization and content to create a more powerful user experience.

We also focus on extending our marketing platform and access to Internet users beyond the Yahoo! Properties through our distribution network of third party entities (referred to as “affiliates”) who have integrated our search offerings into their websites.

Many of our services are free to users. We generate revenues by providing marketing services to businesses across a majority of our properties and by charging our users for premium services. We classify these revenues as either marketing services or fees. Our offerings to users and businesses currently fall into four categories—Search; Marketplace; Information and Entertainment; and Communications and Connected Life. The majority of our offerings are available globally in more than 15 languages. We manage and measure our business geographically. Our principal geographies are the United States and International.

Second Quarter Performance Highlights

Revenues		Our revenues for the second quarter of 2006 increased 26 percent year over year to $1.6 billion, with unique users up 9 percent year over year (or up 28 percent excluding Yahoo! China as of June 30, 2005), fee paying users up 42 percent year over year, and page views up 25 percent year over year (or up 33 percent excluding Yahoo! China as of June 30, 2005). We divested Yahoo! China in October 2005 in connection with our strategic investment in Alibaba and accordingly have recalculated our unique user and page view growth rates as if the unique users and page views of Yahoo! China had been excluded as of June 30, 2005 to allow for comparison between the two periods.

Income from Operations		Operating income for the second quarter of 2006 declined year over year primarily due to the adoption, on a modified prospective basis of SFAS 123R, “Share-Based Payment” on January 1, 2006 which resulted in stock-based compensation expense of $100 million in the second quarter of 2006, compared to $11 million in the second quarter of 2005.

Stock repurchases		We repurchased 13.8 million shares of our common stock in the second quarter of 2006 at an average price of $31.62 per share. We have now repurchased 35.9 million shares of our common stock in the first half year of 2006 at an average price of $33.04 per share.

	Three Months Ended June 30,				2005-2006			Six Months Ended June 30,				2005-2006
Operating Highlights	2005		2006		Change			2005		2006		Change

Revenues	$	1,252,997	$	1,575,854	$	322,857		$	2,426,739	$	3,142,909	$	716,170
Income from operations	$	261,357	$	229,587	$	(31,770	)	$	508,720	$	430,799	$	(77,921	)

	Six Months Ended June 30,						2005-2006
Cash Flow Highlights	2005			2006			Change

Net cash provided by operating activities	$	789,910		$	814,565		$	24,655
Net cash provided by (used in) investing activities	$	543,165		$	(175,457	)	$	(718,622	)
Net cash provided by (used in) financing activities	$	(221,302	)	$	(512,145	)	$	(290,843	)

We believe the search queries, page views, click-throughs and the related marketing services and fees revenues that we generate are correlated to the number and activity level of users across our offerings on the Yahoo! Properties. By providing a platform for our users that brings together our search technology, content, and community while allowing for personalization and integration across devices, we seek to become more essential to, increase our share of, and deepen the engagement of, our users with our products and services. We continue to believe this deeper engagement of new and existing users, coupled with the growth of the Internet as an advertising medium will increase our revenues for the remainder of 2006 over 2005.

Results of Operations

The following table sets forth selected information on our results of operations as a percentage of revenues for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006

Revenues	100	%	100	%	100	%	100	%
Cost of revenues	40		41		40		41
Gross profit	60		59		60		59

Operating expenses:
Sales and marketing	20		21		20		21
Product development	10		13		10		14
General and administrative	7		8		7		8
Amortization of intangibles	2		2		2		2

Total operating expenses	39		44		39		45

Income from operations	21		15		21		14
Other income, net	78		2		42		2

Income before income taxes, earnings in equity interests and minority interests	99		17		63		16
Provision for income taxes	(41	)	(8	)	(26	)	(7	)
Earnings in equity interests	2		1		3		1
Minority interests in operations of consolidated subsidiaries	0		0		0		0
Net income	60	%	10	%	40	%	10	%

Revenues. Revenues by groups of similar services were as follows (dollars in thousands):

	Three months Ended June 30,								Percent		Six months Ended June 30,								Percent
	2005		(1)		2006		(1)		Change		2005		(1)		2006		(1)		Change

Marketing services	$	1,094,301	87	%	$	1,386,245	88	%	27	%	$	2,119,097	87	%	$	2,767,099	88	%	31	%
Fees	158,696		13	%	189,609		12	%	19	%	307,642		13	%	375,810		12	%	22	%
Total revenues	$	1,252,997	100	%	$	1,575,854	100	%	26	%	$	2,426,739	100	%	$	3,142,909	100	%	30	%

(1) Percent of total revenues.

Marketing Services Revenue. Marketing Services revenue for the second quarter of 2006 increased by $292 million, or 27 percent, as compared to the same period in 2005. Marketing Services revenue for the six months ended June 30, 2006 increased by $648 million, or 31 percent, as compared to the same period in 2005. Our year over year growth in marketing services revenue was impacted by declining revenues from our relationship with Microsoft Corporation (“Microsoft”) who largely transitioned its U.S. business in-house during the three months ended June 30, 2006. The year over year growth in our marketing services revenue can be attributed to a combination of factors that are driving increased advertising revenue across the entire Yahoo! Properties. These include an increase in our user base and activity levels on the Yahoo! Properties, which resulted in a higher volume of search queries, page views and click-throughs. We believe our increased user audience has attracted new advertisers to our portfolio of marketing solutions and contributed to the increase in our marketing services revenue over the prior year period.

On the Yahoo! Properties, our number of unique users worldwide as of June 30, 2006 was approximately 9 percent higher than the number of unique users as of June 30, 2005. Unique users are the estimated number of people who visited the Yahoo! Properties in a given month. If the unique users of Yahoo! China had been excluded as of June 30, 2005, our estimated unique users as of June 30, 2006 would have been 28 percent higher than as of June 30, 2005.

We have refined our method for computing changes in the volume of page views and searches and average revenue per page view and search this quarter to include only page views (which include searches) on the Yahoo! Properties and searches performed on our affiliate network sites, and to exclude the impact of content match links. Since the introduction of the content match offering last year, the growth in the number of content match links on our affiliate network sites has been significant but the related revenues have not been proportionate, resulting in a disproportionate impact on our volume and revenue yield measures as computed under our prior methodology.

Using this refined method, which we believe more accurately reflects trends in our volume and revenue yield measures, the combined number of page views and searches increased by approximately 20 percent and 21 percent in the three and six months ended June 30, 2006, respectively, as compared to the same periods in 2005. The increases in the volume of page views and searches can be attributed to an increased number of users, an increased number of affiliates, and an expanded offering of properties which increased our inventory of page views. The combined average revenue per page view and search increased by approximately 4 percent and 7 percent in the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005. Our combined revenue per page view and search was benefited as we expanded our offerings on the Yahoo! Properties, introduced new inventory with different yields and better monetized our inventory.

Applying this refined method for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005, the combined number of page views and searches increased by approximately 21 percent in the three months ended March 31, 2006 and the combined average revenue per page view and search increased by approximately 9 percent, respectively, when compared to the prior year.

We believe our growing number of users, advertisers and inventory has been driving this growth in our marketing services revenues. We believe our expanding offerings as well as our enhanced algorithmic search technology, which provides a new level of personalization to the search experience, contribute to our growing number of users. As our user base increases, we generate a higher number of page views, which we view as inventory, and process a higher number of search queries which potentially result in a higher number of impressions and paid clicks. We also believe that our growing user base makes the Yahoo! Properties more attractive to advertisers and increases their spending on marketing solutions. Further, we believe the growth in users on the Yahoo! Properties and on the Internet overall reflects the increasing acceptance, importance and dependence of users on the Internet. As a result of the increasing online audience, we believe advertisers are shifting a greater percentage of their spending from traditional media to the Internet to reach this growing audience.

Fees Revenue. Fees revenue for the second quarter of 2006 increased $31 million, or 19 percent, as compared to the same period in 2005. Fees revenue for the six months ended June 30, 2006 increased $68 million, or 22 percent, as compared to the same period in 2005. The year over year growth is associated with an increase in the number of paying users for our fee-based services, which numbered 14.3 million as of June 30, 2006, compared to 10.1 million as of June 30, 2005, an increase of 42 percent. Our increased base of paying users was due to growth in users across most of our offerings, with the largest growth generated from new Internet broadband users. Our fee-based services include Internet broadband services, sports, music, personals, and premium mail offerings, as well as our services for small businesses. Average monthly revenue per paying user has decreased to approximately $3.50 for the three and six months ended June 2006, compared to approximately $4.00 for the same periods of 2005. The decline in average monthly revenue per paying user reflects the continued growth of paying users in our services with lower fees.

Costs and Expenses: Operating costs and expenses were as follows (in thousands):

	Three Months Ended June 30,								Percent		Six Months Ended June 30,								Percent
	2005		(1)		2006 (2)		(1)		Change (2)		2005		(1)		2006 (2)		(1)		Change (2)

Cost of revenues (3)	$	500,158	40	%	$	645,767	41	%	29	%	$	967,082	40	%	$	1,303,710	41	%	35	%
Sales and marketing	$	247,915	20	%	$	325,845	21	%	31	%	$	479,924	20	%	$	657,005	21	%	37	%
Product development	$	129,285	10	%	$	208,743	13	%	61	%	$	251,896	10	%	$	426,320	14	%	69	%
General and administrative	$	87,128	7	%	$	131,909	8	%	51	%	$	165,387	7	%	$	260,214	8	%	57	%
Amortization of intangibles	$	27,154	2	%	$	34,003	2	%	25	%	$	53,730	2	%	$	64,861	2	%	21	%

(1) Percent of total revenues.

(2) Effective January 1, 2006, we adopted SFAS 123R and recorded stock-based compensation expense under the fair value method. Prior to January 1, 2006, we accounted for stock-based compensation under APB 25 and used the intrinsic value method. In the three and six months ended June 30, 2006, we recorded $100 million and $208 million, respectively, of stock-based compensation expense compared to $11 million and $20 million for the three and six months ended 2005, respectively. This stock-based compensation expense has been included in the same income statement category as the cash compensation paid to the recipient of the stock-based award.

(3) For the three and six months ended June 30, 2005, we have reclassified amortization expense of $14 million and $28 million, respectively, relating to developed technology and patents acquired through acquisitions, in the condensed consolidated statements of income from operating expenses to cost of revenues to conform with the classification for the three and six months ended June 30, 2006. For the three and six months ended June 30, 2006 cost of revenues includes amortization expense of $23 million and $49 million, respectively, relating to developed technology and patents acquired through acquisitions.

Stock-based compensation expense was allocated as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006

Cost of revenues	$	—	$	1,582	$	—	$	3,267
Sales and marketing	1,509		38,489		2,999		77,356
Product development	3,741		36,170		7,003		73,887
General and administrative	5,698		23,482		10,412		53,854
Total stock-based compensation expense	$	10,948	$	99,723	$	20,414	$	208,364

See Note 10—“Stock-Based Compensation” in the condensed consolidated financial statements as well as our Critical Accounting Policies, Judgments and Estimates for additional information about stock-based compensation.

Cost of Revenues. Cost of revenues consists of traffic acquisition costs (“TAC”) and other expenses associated with the production and usage of the Yahoo! Properties. TAC consists of payments made to affiliates who have integrated our search and advertising offerings into their websites and payments made to companies that direct consumer and business traffic to the Yahoo! Properties. Other cost of revenues consists of fees paid to third parties for content included on our online media properties, Internet connection charges, data center costs, server equipment depreciation, technology license fees, amortization of developed technology and patents, and compensation related expenses (including stock-based compensation expense).

Three Months Ended June 30,

Percent

Six Months Ended June 30,

Percent

2005

(1)

2006

(1)

Change

2005

(1)

2006

(1)

Change

TAC

377,885

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2006	3
	Condensed Consolidated Balance Sheets as of December 31, 2005 and June 30, 2006	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2006	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 5.	Other Information	52
Item 6.	Exhibits	53
	Signatures	54

	Six Months Ended
	June 30, 2005			June 30, 2006

Cash paid for acquisitions	$	127,452		$	63,006
Cash acquired in acquisitions	(1,078		)	(7,677		)
	$	126,374		$	55,329

Common stock, restricted stock and stock options issued in connection with acquisitions	$	44,381		$	—